The Great US Dollar

Wednesday, March 25th, 2009 at
8:05 PM

Timothy Geithner (he’s really becoming a big celebrity these days) was on the telly again. It’s a mark of the amount of confidence he seems to have built up since that fateful day in February when he spoke and the markets crashed. Well…not crashed; but made a big drop all the same.

This time Tim was making some comments about this whole issue of the the US Dollar’s fall from grace, and how there should be a new reserve currency basket of currencies. China threw that out there for everyone to “feel” a couple of days ago. There are those who feel that both The Chairman of the Fed, Ben Bernanke, and Geithner himself are not exactly opposed to the idea. I mean Ben just poured a trillion dollars into the mix. This sort of thing is not exactly dollar-supportive.

Well, today Timmy acknowledged that he would be open to seeing the dollar lose it’s superstar status. What?! Shock, Horror! The markets reacted accordingly, ending what had started out as a pretty good day. The dollar also lost ground to most currencies. Not the Pound though. The brits are in real trouble if Sterling could not gain on the dollar on a day like this. Mr. Geithner then somewhat retracted his earlier comment later on, stating that it was in the United States best interest to have a strong dollar, yada yada yada. Markets (and the dollar) managed to claw back some ground after these comments.

So why all the back and forth? Why the mixed message? Did Geithner get carried away and make the comments by accident? What’s really going on here? And what’s the big deal about the US being the reserve currency of the world anyway? It’s a question of confidence. If the US is not to be a favourite, what does that do to investments and confidence in US based assets? Also, part of this has to do with the US recovering and leading the world out of this recession. Any whiff of fear from the people who should be fixing stuff – namely, Tim Geithner – and investors will run for the hills. In this climate, a poor dollar might ultimately undo everything they are trying to repair in the economy.

There is a general consensus…sort of…that the Dollar will lose it’s status as the dominant reserve currency. The question is when, and to what. THe Euro is a big contender. There’s also this talk of a basket of currencies, including the dollar itself, but also including some of the up and coming currencies from countries like India with good economic growth and potential. There’s much in the dollar’s favour for now, such as the fact that Oil is priced in Dollars. Still, it will happen eventually.

Still nothing major to help us work out whether this is a Bear Market rally or the real thing. There could be more sideways movement until we get some more news…positive or negative. Retail Sales out of England (could be bad) and 4th Quarter GDP are notable. We’ll just have to wait and see.